Info & Data

Downtown Restaurant Case Study

Case Study for Downtown Tucson: Restaurant

Background:

The Garcia family has been operating a successful full service restaurant on the east side for 20 years. Restaurants are an important part of the economy. In the United States, restaurant sales represent 4% of the gross domestic product, and every dollar spent on dining out generates $2.05 spent in the overall economy, according to the National Restaurant Association. The restaurant industry is the second-largest private-sector employer in the US, making up 10% of the workforce.

The Garcias want to open a second restaurant downtown. They base this decision on:

Key to a business plan is the balance sheet, which is a snapshot of how the business is doing at a particular point in time, and the profit and loss sheet (P&L), which sets out the profits and losses of the company over a period of time. Most investors or banks will want to see at least two (2) years of financial data from an existing company; the Garcias intend to project three (3) years out with their new restaurant downtown as well.

The attached Excel spreadsheets set forth the Balance Sheet and P&L for the Garcias.1 Assumptions are: machinery depreciates over 7 years and the commercial building over 39 years. Impact fees from the City of Tucson are detailed here.

Pro forma:

The Garcias have decided to purchase a building located on the corner of Pennington Street and Scott in the heart of downtown Tucson. The building is an older building (in service before 1935), needs significant rehabilitation, and renovations to it will qualify for Historic Tax Credits (see more about this below). The cost is $125/square foot, and the building is 2800 square feet (purchase price for the property is $350,000, $150,000 attributable to the building and improvements and $100,000 for the land). The buyers intend to invest an additional $350,000 to rehabilitate the property to be used as a restaurant.

A development budget, the sources and uses, and an analysis of the tax and appreciation benefits are below.

Underwriting Standards Applied:

Assuming an interest rate of 6%, a term of 10 years, and the bank’s requirement of 80% loan-to-value ratio, based upon the income projected to be generated by the business, the Garcias qualify for a conventional loan of $315,000.

Sources and Uses:

Uses of funds:

Acquisition of real estate: Building: $250,000, land: $100,000

Build-out costs for restaurant: $350,000

Other costs related to project: $150,000

Furniture and fixtures: $20,000

Total: $870,000

Sources of funds:

Owner’s equity: $300,000

Conventional bank loan: $315,000

Gap: $255,000

Ways to bridge the gap:

Historic Tax Credits (20%): $ 95,000 gross

SBA 504 loan: SBA 504 loan may be used instead of conventional financing which will only lend 80% of cost of purchase of real estate (or $315,000). SBA program is 50-40-10 – conventional bank must lend 50% of the entire amount being financed (still will be $315,000 which is limit for bank), then SBA will lend 40% ($252,000), and borrower must come up with at least 10% (but borrower has $300,000 to contribute to project + $95,000 in Historic Tax Credits). Financing package looks like this:

Conventional bank loan: $315,000

SBA loan: $252,000

Historic Tax Credits: $ 95,000

Owner’s equity: $208,000 (with approximately $100,000 left for working capital for business)

Other Applicable Incentives:

Development impact fee deferral: If the developer enters into an agreement with the City of Tucson, the developer may defer paying impact fees at the time they are due (at the start of construction) and instead put the fee into an interest-bearing account for the duration of the project. When the developer receives the Certificate of Occupancy for the completed project, the impact fees will be due but the developer may retain half of the interest generated from the fees as long as the developer has agreed and contributes the other half of the interest to the Community Land Trust. More details are available here.

Infill incentive district: The City of Tucson will expedite the development process for properties located within the district. Details are here.